Bombay High court held In the case of M/s Nagpur Engineering Co. Pvt. Ltd. vs. CIT. that in order to attract ceiling u/s 40(c), the payment must be a periodical payment. A Lumsum payment or one time payment is not covered under section 40(c) of Income Tax Act, 1961.

Facts of the Case

In this case, company makes commission payments to his directors over and above the remuneration paid to them. While assessment, AO calculated the reasonable figure of commission and disallowance made u/s 40(c)(iii). Disallowance was upheld by the CIT(A) and ITAT. The following two questions have refereed by the ITAT on the application of assessee –

“1.Whether the commission on sales paid by the assessee constituted “the provisions of any remuneration or benefit or amenity” within the meaning of Section 40(c)(iii) of the Income Tax Act, 1961?

2.That in view of the findings recorded by the Tribunal that the claim of commission paid was reasonable, any dis­allowance under section 40(c) is permissible ?”

Contention of the Assessee

The ld Councel of the assessee submitted that the commission paid to the Directors was a lumsum payment based on the annual turnover. Such payments are not subject to section 40 (c). He also refered certain judgments to substantiate his contentions.

Contention of the Revenue

The ld Counsel of the revenue submitted that in this case commission has been paid to the Directors of the company which were under its control and monthly breakup of such commission can be made even if payment has been made in lumsum. Further he submitted that in case Directors are being paid remuneration and commission has been paid over and above it, it will be covered u/s 40(c)(iii).

Held by CIT (A)

The disallowance u/s 40(c)(iii) was upheld by the CIT(A). It has relied upon on two judgments namely (1996) 217 ITR (378) (Bom) (Sapt Textile Products India Ltd. vs. CIT) and (1994) 210 ITR 770 (CIT vs. Colgate Palmolive (India)) in which applicability of provisions under section 40(c) and section 40A(5) were discussed. Wherein it has held that payment was done on retirement, gratuity and one of the director is allowed not includible under this section. It has further observed that the maximum ceiling in sec 40(c) is clearly in respect of periodic payments only.

Held by ITAT

The order of first appellate authority was confirmed by the ITAT regarding the disallowance of excessive commission paid to directors.

Held by High Court

The Hon’ble Apex court has approved the finding of Karnataka High court in the case (1980) 121 ITR 551 (Kar) ( T.T.Krishnamachari & vs. ITO) that section 40(c) refers to an expenditure incurred by making periodical payments to a person mentioned in that clause apparently for any personal service that may be rendered by him. It is also clear that in order to attract ceiling under section 40(c), the payment in dispute must be shown to be a periodical payment. A lumsum payment or onetime payment does not fall in it. In present case the fact that commission was payable only if annual turnover exceeds Rs. 2 Crores is not in dispute. Thus payment of commission was contingent upon turnover and not periodical. In their findings of CIT (A) stated that commission paid was not excessive or unreasonable. Hence, following this law, we find that the commission on sales paid by the assessee could not subject to provisions of section 40(c)(iii).